The Significance of Piketty (and the estate tax)

Even so, this critique misses out on what’s interesting – and potentially very depressing – about Piketty’s theoretical account. Standard economic arguments start from an implicit set of assumptions about the absence of power relations. Perfect competition, by definition, is a state of the economy in which no one actor is more powerful than another – all actors are price takers, not price makers. This leads to a highly fruitful set of arguments about how real life markets – let alone polities – just aren’t like that. Markets aren’t perfect. Inequalities are rife. And as people like Jack Knight, Doug North when he was wearing his former-Marxist hat and (obviously, far more modestly) me have argued, this provides the foundations for a reasonably excoriating critique of standard economic claims. To the extent that the happy assumptions of perfect competition are not justified, so that power relations matter, we have no theoretical warrant whatsoever to believe that powerful and self-interested actors will influence institutions towards socially optimal outcomes. Specifically, these theories draw attention to the distributional consequences of institutions – i.e. who gets what. Unequal power leads to unequal influence over the institutions that distribute the benefits of cooperation, which in turn means that the benefits are likely to be distributed in unequal and inefficient ways. Here, there’s a hidden theoretical connection between standard economic critiques e.g. of monopoly and left-rationalist critiques of how actually-existing capitalism works. The latter, in a sense, draw the full conclusions of the arguments of the former. Both suggest moreover that in a world where there weren’t any power disparities, so that actors were fully equal participants in markets and politics, the problems of skewed institutions and unequal distribution of gains would disappear. Bringing conditions closer to the true equality of perfectly competitive markets would largely solve the problem.

Piketty’s claim is potentially much more corrosive. For him, the fundamental problem isn’t one of flawed markets and unequal power. It’s one of markets working as they are supposed to. In Piketty’s description (p.27), ‘the more perfect the capital market (in the economist’s sense, the more likely r is to be greater than g.’ Even more bluntly, the r>g inequality (p.424) ‘has nothing to do with market imperfections and will not disappear as markets become freer and more competitive. The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.’ If Piketty is right, institutional reforms aimed at removing market imperfections will do nothing to address the fundamental problem of economic inequality, and may, indeed, exacerbate it. The problem isn’t in the institutions but in market capitalism itself, so that efforts to reform corrupt institutions will not fix the core problem--Henry Farrell, CrookedTimer. [Emphasis added.]

I have been following the Thomas Piketty seminar at Crookedtimer with interest (as somebody who has done some blogging on Piketty). Farrell really nails what matters about Piketty's Capital (in a way I had not managed, although I think several other contributors at Crookedtimber could have benefitted from reading my posts; I can also recommend this review by Blume and Durlauf, which is fair and critical). Farrell understates the point. Because one further way in which markets are not perfect is due to rent-seeking behavior by political insiders; which is why excessive profits (let's stipulate relative to risks) always generate questions about politically imposed imperfections (patents, trade-protection, standards, barriers to entry, etc.) in the market. So, a humanitarian reformist can always choose between improving market competition or finding direct ways to compensate the rest of society (through taxes, subsidies, etc.). That is to say, there is an implicit theodicy in modern thought about markets: for all the evils (big and small) accompanying markets (not to mention luck), pure and perfect markets generate the best of all possible worlds (for many areas of social life) and, thereby, deliver progress. Piketty can be taken to undermine the theodicy because -- if he is right -- in the long run we'll just be vastly more unequal. 

Even so, it is notable that Farrell does not mention an obvious market imperfection: the right to inheritance. Inheritance between generations is not secured by the market, but by governments' excessive willingness to protect and promote the wishes of the deceased. Piketty discusses the significance of significant estate taxes in the history of progressive taxation (see, especially, 502-9). Oddly, he does not advocate it in his conclusion (he focuses on a global capital tax, in large part, to promote transparency and further research as discussed by Kevin Vallier and myself, and earlier here). I say "oddly" because he notes how effective it had been. While he rightly worries about the effects of a heavy tax on capital (it would prevent "entrepreneurs" from turning "into rentiers, since there would be no more entrepreneurs," (572) a tax on inheritance does not prevent entrepreneurship (especially if it is combined with relatively low taxes on earned income).*

Given that Piketty does not advance the estate tax as one of his official solutions, it should not be such a surprise that the estate tax is ignored by the official commentators at Crooked Timber (even though some of the contributed comments by readers do mention it). Anderson explicitly leaves the "tax code" aside. Anne Cudd basically defends the justness of inheritance if the income is acquired justly and the effects of inheritance do not create unjustness (when, for example "inherited wealth creates a privileged group like other forms of oppression.") But why society should protect the wishes of the dead in this way is by no means obvious.  No positive argument is given, and I am unfamiliar with any one that is compelling (even Nozick recognizes there is something fishy about gift-giving through generations).

One need not be a luck egalitarian to find it odd that the government should be instrumental in ensuring that some get more through no effort whatsoever of their own. The estate tax may, in fact, be the most just tax there is; collecting it requires the fewest violations of liberty (last wills are part of the public record, etc.)--go read Adam Smith. If the estate tax is set high enough, then  r>g does not occur. It does not follow that the outcome patterns that would then occur in pure and perfect markets are always desirable, but that's a different issue (recall).

 

*It may discourage some entrepreneurship, but there is no reason it would kill it.

Comments

[David Duffy]

Which long-lived human social institution other than the family or clan has a similar tax status? A family business usually has a succession and similar implicit generational transfer of wealth, but do estate taxes affect them in most jurisdictions? (You mentioned Le Guin in an earlier post - she of course has a 100% death duty in Orgoreyn.)